Richard Shane

Ricchard Shane asked about the factors contributing to the improved credit card charge-off rate, including fundamental improvements, seasonality, and denominator effects from growth, and inquired about OneMain Financial's long-term target loss rate for the card book. He also questioned whether the capital held against the growing credit card portfolio would be higher compared to traditional consumer loans, given the higher loss expectations.

Answer

Jenny Osterhout (CFO, OneMain Financial) confirmed that credit card net charge-offs improved by 22 basis points year-over-year to 17.1% in Q4 2025, expecting continued improvement towards a long-term target range of 15%-17% due to portfolio seasoning and enhanced servicing/recovery capabilities. She noted that high revenue yields on cards cushion these losses. Regarding capital, she stated that credit card reserve levels are higher, around 22%, and OneMain manages capital across the business with a 20% return on tangible equity hurdle, applying additional stress overlays across all products.

Ricchard Shane asked whether the capital held against OneMain Financial's growing credit card portfolio would be higher than for traditional consumer loans, given the higher loss expectations for cards.

Answer

Jenny Osterhout (CFO) confirmed that credit card reserve levels are higher, around 22%. She explained that capital is managed across the entire business with a focus on meeting the 20% return on tangible equity hurdle, applying additional stress across all products, including cards. She views the card portfolio as a significant source of future profitability.

Richard Shane asked for a macro perspective on the health of OneMain's consumer on a like-for-like basis, independent of portfolio mix changes, and inquired about the key inputs the company monitors.

Answer

CEO Doug Shulman responded that the consumer has been quite stable for over a year. He emphasized that underwriting focuses on customer-specific data like net disposable income, rather than broad macro trends. He noted that in aggregate, wage growth has caught up with inflation, which is a positive for their customers' ability to pay, and this is the primary factor they underwrite to.

Richard Shane inquired about the drivers behind strong recovery performance, asking if it was related to used car prices or a catch-up from prior charge-offs, and also asked about the current pricing for sales of charged-off receivables.

Answer

CFO Jenny Osterhout stated that strong recoveries are driven by internal operational efforts rather than used car prices, with performance expected to remain similar going forward. She noted that the value of bulk sales of charged-off loans was in line with the prior year. Regarding pricing on these sales, she mentioned it was 'slightly down' compared to a year ago but remains 'pretty stable' with consistent demand.

Richard Shane of JPMorgan Chase & Co. explored the impact of product mix shift, asking how the growth of lower-yielding auto loans will affect overall yield and whether risk-adjusted returns will remain comparable across products. He also sought to quantify the pricing power on a like-for-like basis within the top-tier personal loan segment over the last year.

Answer

CFO Jenny Osterhout acknowledged the mix shift to auto will impact yield but noted it's offset by pricing power in personal loans, expecting overall yield to still grow gradually. She confirmed risk-adjusted returns are attractive across products. For pricing power, she highlighted the approximately 100 basis point increase in consumer loan origination APR since Q2 2023 as the key metric, driven primarily by the higher end of their book.

Richard Shane from JPMorgan Chase & Co. questioned the financial impact of KREF's over $800 million in REO and non-accrual loans, including a newly added watchlist loan, asking if approximately 20% of the portfolio would be under-earning or have negative carry in 2026. He also sought confirmation on whether KREF's dividend policy would be based on empirical financial analysis rather than market sentiment.

Answer

President and COO Patrick Mattson clarified that the recently downgraded watchlist loan is still making contractual interest payments, thus not immediately impacting earnings. He acknowledged REO assets are currently affecting earnings but highlighted a near-term opportunity to convert them, estimating a $0.13 upside from REO resolution. CEO Matt Salem affirmed that the dividend policy would be guided by rational financial analysis and near-term earnings impact during portfolio rebalancing.

Richard Shane inquired about the financial impact of over $800 million in REO and non-accrual assets, including the newly downgraded Boston life science loan, on KREF's 2026 earnings, and sought clarification on the dividend policy's reliance on empirical financial analysis versus market sentiment.

Answer

President and COO Patrick Mattson clarified that the Boston life science loan, despite an anticipated downgrade, is currently making contractual interest payments and is expected to continue, thus not immediately degrading earnings. He noted that REO assets are the primary drag on earnings, with an estimated $0.13 per share upside upon their conversion to performing assets. CEO Matt Salem confirmed that the dividend policy is being evaluated based on a 'fair articulation' of near-term earnings impact and portfolio rebalancing, emphasizing disciplined decisions.

Richard Shane of JPMorgan Chase & Co. asked about the impact of macro issues on the portfolio versus specific property risks and inquired about the dividend policy in light of current returns and recent share repurchase activity.

Answer

CEO Matt Salem explained that KREF is monitoring macro impacts on jobs and trade but is more focused on property-specific risks like leasing decision slowdowns. Regarding the dividend, he stated the company is comfortable with the current level, citing the embedded earnings power from REO assets, which could add $0.12 per share quarterly upon resolution. He affirmed a balanced approach to capital allocation between attractive share buybacks and necessary investments in new loan originations.

Richard Shane asked whether the increase in transaction activity is driven by price discovery or by market participants gaining confidence that the cycle has bottomed. He also questioned if loan durations are normalizing, with new loans potentially resolving faster than the extended loans seen during the downturn.

Answer

CEO Matt Salem explained that transaction volume is increasing due to a narrowing bid-ask spread and the acute need for owners to make decisions as loan maturities approach, describing it as a 'slow deleveraging process.' He noted that office is a separate case where liquidity was near zero and is only now starting to return for the highest-quality assets. Regarding loan duration, Salem agreed that new loans made on reset bases are likely to be shorter-term as sponsors execute business plans and seek to refinance or sell in a better environment.

Richard Shane asked whether the clearing of real estate transactions is more a function of price discovery or renewed market confidence. He also questioned if the strategy for the Minneapolis office loan was an example of this dynamic, and whether the effective duration of loans is shortening again after a period of extensions.

Answer

CEO Matthew Salem explained that transaction volume is increasing due to a narrowing bid-ask spread and maturing capital structures forcing owner decisions, rather than a fundamental shift in confidence. He clarified that office is a separate case where liquidity was near zero and is only now starting to return for top-tier assets. Mr. Salem agreed that loan durations are likely to shorten, as new loans are made at reset valuations and sponsors with stabilized assets can now access more liquid debt markets to refinance earlier.

Richard Shane asked about the credit performance of Enact's newer book (post-2022) compared to expectations, specifically if any cohorts (DTI, LTV, geography) show elevated risks, and if there are any areas where Enact is becoming more circumspect about risk going forward.

Answer

Dean Mitchell, Chief Financial Officer and Treasurer, confirmed that all recent book years (2022-2024) are performing in line with or better than pricing expectations, despite higher risk attributes in purchase markets. He noted that Enact monitors housing markets in areas like the Sun Belt (Florida, Texas, California, Arizona) where home prices have moderated or declined. Rohit Gupta, President and Chief Executive Officer, emphasized the company's deep analytics and ability to make frequent, granular pricing adjustments based on risk attributes and geographic differences.

Richard Shane from JPMorgan Chase & Co. asked about the total addressable market (TAM) for new insurance written (NIW), questioning if lower-than-expected industry volumes were due to market share shifts or a smaller market. He also asked how this outlook impacts capital return plans.

Answer

President & CEO Rohit Gupta responded that Enact's view of the 2025 MI market size remains similar to 2024's ~$300 billion, though the path to that figure has changed. He cited high mortgage rates suppressing the purchase market and uncertainty around trade policy as headwinds. Regarding capital, Gupta explained that the increased capital return guidance to ~$400 million is driven by strong actual performance and a balanced approach to capital allocation, considering business conditions and opportunistic share repurchases.

Richard Shane highlighted the changing composition of Enact's insurance book, noting a lower concentration of recent vintages compared to three years ago, and asked about the associated risks and opportunities. He also followed up on whether home price appreciation (HPA) assumptions in underwriting are now more conservative.

Answer

CFO and Treasurer Hardin Mitchell explained that the portfolio's increased seasoning is slowing the growth rate of new delinquencies and that all vintages are performing as expected, with risk differences priced in. President and CEO Rohit Gupta added that a more seasoned book is more resilient. Regarding HPA, Mitchell confirmed that their prospective view, which includes slower HPA, is embedded into current pricing.

Richard Shane highlighted the significant shift in Enact's portfolio composition, where recent vintages ('23-'25) form a much smaller part of the book than they did three years ago. He asked about the best-case scenarios and key risks of this unusual profile and followed up by asking if HPA assumptions for new policies are more conservative now.

Answer

CFO and Treasurer Dean Mitchell addressed the portfolio's seasoning, noting it should slow new delinquency development. He confirmed that while new vintages have different risk attributes, performance aligns with pricing expectations. President and CEO Rohit Gupta added that a more seasoned book with embedded equity provides resilience in an uncertain environment. Both executives confirmed that prospective views, including slower home price appreciation (HPA), are factored into current pricing, making it more conservative than in prior years.

Richard Shane of JPMorgan Chase & Co. followed up on the buydown topic, asking if Enact is seeing any marginal difference in credit performance as temporary buydowns begin to reset, and whether the market is pricing these products differently.

Answer

President and CEO Rohit Gupta confirmed that the majority of their related volume is in permanent buydowns with no payment shock. For the minority of temporary buydowns from the 2022 vintage that have started to reset, he stated they have not observed any performance differential. Gupta declined to comment on specific pricing attributes, citing competitive strategy, but reiterated the company's principle is to 'right price for the right risk' using granular pricing and underwriting adjustments for layered risks.

Richard Shane asked about Capital One's long-term vision regarding target efficiency ratios and whether the 2027 guide will be achieved through revenue growth or a peak and recession in expenses, given the company's consistent investment strategy.

Answer

Chairman and CEO Richard Fairbank clarified that Capital One's efficiency journey is primarily driven by revenue growth, not just expense management. He described the company's strategy of focusing on structurally good market opportunities and leveraging growth platforms, citing Brex as a classic example. Mr. Fairbank acknowledged that current investments, including those in the tech platform, Discover network, and Brex, will pressure the efficiency ratio in the near term but are designed to drive future revenue growth and long-term value creation.

Richard Shane asked about Capital One's long-term vision, target efficiency ratios, and the 2027 guide, specifically whether efficiency ratio improvement would be driven by revenue growth or a peak and recession in expenses.

Answer

Chairman and CEO Richard Fairbank explained that Capital One's efficiency journey is primarily driven by revenue growth from capitalizing on structural market opportunities and leveraging growth platforms like Brex. He reiterated that current investments, while pressuring the efficiency ratio in the near term, are in service of driving future revenue growth and long-term value creation, reflecting a consistent investment philosophy since the company's founding.

Richard Shane questioned Capital One's domestic card reserve rates, noting they are at 2022 lows despite higher delinquencies, and asked about the potential for further reserve releases given that charge-offs may remain above historical norms.

Answer

Andrew Young, CFO, explained that the allowance movements in Q3 were driven by observed credit favorability (including recoveries), an improved economic forecast (lower unemployment), and additional consideration for economic downside. He highlighted that the quantum of recoveries is now greater than in 2022, providing a tailwind to the current allowance, and future allowance levels will be guided by expectations of future losses and customer behavior.

Richard Shane from JPMorgan Chase & Co. questioned Capital One's domestic card reserve rates, noting they were at their lowest since late 2022 despite materially lower delinquencies then, and asked if there was room for further reserve release given expected charge-off trends.

Answer

Andrew Young, Capital One's CFO, explained that the Q3 2025 allowance release was driven by favorable observed credit performance (including recoveries), an improved economic forecast (lower peak unemployment), partially offset by increased consideration for economic downside. He noted that the quantum of recoveries was greater than in 2022, providing a tailwind to the current allowance, and future coverage would depend on economic assumptions and customer behavior, with delinquencies as a key indicator.

Richard Shane from JPMorgan Chase & Co. asked for more specific details on why Discover integration expenses are projected to be higher than the initial $2.8 billion estimate and where the incremental investment opportunities are being seen.

Answer

Richard Fairbank, Founder, Chairman & CEO, explained that the higher integration cost estimate is not due to a single item but is spread across various elements of the complex integration. He emphasized that the investment opportunities in areas like the tech stack, brand, and AI are not new but are accelerating, requiring the company to 'lean in' to capture what he described as the broadest set of opportunities in the company's history.

Richard Shane inquired about the comparison between Capital One's and Discover's technology stacks, asking about the ease of transitioning Discover's systems given the apparent divergence in recent technology investment.

Answer

Richard Fairbank, Chairman and CEO, described Capital One's modern tech stack as ideally suited to absorb Discover's card business. However, he acknowledged that Discover operates on mainframes and in data centers, which Capital One will manage during the transition. He noted the network is a new area, and while they will run Discover's existing network, modernizing it will be a multi-year journey.

Richard Shane asked whether charge-off rates should be expected to remain structurally higher as long as interest rates are higher, or if a reversion to historical loss rates is possible in the current environment.

Answer

CEO Richard Fairbank speculated that if interest rates stabilize and wages keep pace with inflation, it is plausible for credit card charge-off rates to return to levels consistent with historical patterns. He emphasized that the primary reason for currently elevated loss rates is likely the "delayed charge-off" effect from unprecedented pandemic-era stimulus and forbearance, which he expects will resolve over time.

Richard Shane asked about the timeline for releasing capital from the legacy investment portfolio, how that capital would be allocated across the three core businesses, and the factors driving the expansion of Sequoia's ROE.

Answer

CEO Chris Abate stated that freed-up capital is quickly deployed into mortgage banking across all three platforms (Sequoia, Aspire, Corvus) due to their significant growth rates. President Dash Robinson attributed Sequoia's ROE expansion to enhanced capital efficiency (quick loan turnover, 13 securitizations year-to-date), improved operating efficiency (better expense-to-revenue ratio), and synergies with Aspire. He also highlighted Aspire's growing market share and Sequoia's increasing volume from bank collateral, which reached nearly 50% in Q3.

Richard Shane asked how Redwood manages liquidity and execution risk given its significant $4 billion lock volume in a volatile market, and sought clarification on whether the large bulk purchases were closed, seasoned loans.

Answer

President Dashiell Robinson emphasized that speed of execution and pre-arranged distribution partners are key, noting half the Q1-end pipeline was sold or securitized shortly after quarter-end. CEO Christopher Abate confirmed the bulk purchases are seasoned pools from banks, which they now view as a core addressable market, and they focus on immediate distribution plans upon purchase.

Richard Shane of JPMorgan Chase & Co. asked about the income mix shift in mortgage banking, the cause of rising delinquencies in the CAFL portfolio, and the risk profile of the Aspire product versus traditional Sequoia loans.

Answer

CFO Brooke Carillo attributed the income mix shift to hedging strategies. President Dashiell Robinson explained the CAFL delinquency rise was partly due to a shrinking portfolio size. CEO Christopher Abate positioned the Aspire product as a strategic expansion to serve existing partners moving into non-QM, noting that while credit quality will be strong, its performance profile will differ from 'super prime' jumbo loans.

Richard Shane of J.P. Morgan Chase & Co. inquired about the net discount on Redwood's investment portfolio, questioning if the portion created since the Fed's tightening cycle adequately reflects potential credit risk in the capital securities.

Answer

President Dashiell Robinson clarified that while risks differ, the majority of the discount is in the strongly performing reperforming loan portfolio, and realized losses in the capital securities book have been low. CEO Christopher Abate added that the vast majority of the discount is considered recoverable, positioning the company well for a potential rate easing cycle.

Richard Shane from JPMorgan Chase & Co. asked for details on persistency trends, particularly for the 2020 and 2021 vintages, questioning if it was due to natural aging or external factors like second liens. He also asked about Essent's strategic willingness to pull back on originations during uncertain periods.

Answer

Chairman & CEO Mark Casale attributed lower persistency in older vintages to natural seasoning and life events, not a significant increase in second liens. He highlighted the business model's natural hedge between NIW and persistency. On strategy, Casale affirmed Essent is not afraid to accept lower market share based on pricing and returns, noting their EssentEDGE credit engine provides an advantage in volatile markets, though credit competition is currently low.

Richard Shane of JPMorgan Chase & Co. asked about the housing affordability cycle, questioning if the market is at an inflection point for consumers, and inquired about specific geographic areas of optimism or caution and how Essent adjusts its rate cards accordingly.

Answer

Chairman and CEO Mark Casale addressed the questions, explaining that the current affordability challenge is an "anomaly" stemming from the pandemic's low rates followed by a rapid rate hike. He believes the cycle will normalize as incomes catch up with home prices and life events unlock housing supply, noting the high average age of first-time homebuyers (38) indicates significant pent-up demand. Casale stated that Essent's pricing model, EssentEDGE, allows for dynamic adjustments, and they have raised prices in certain markets to test elasticity while generally focusing on areas with strong population and job growth.

Richard Shane of JPMorgan Chase & Co. questioned how Essent handles the growing issue of expensive homeowners insurance, its impact on risk pricing and affordability, and the potential chilling effect on home price appreciation (HPA).

Answer

Chairman and CEO Mark Casale explained that mortgage requirements ensure borrowers have insurance, protecting Essent. He noted that while rising insurance costs are a factor in affordability, they represent a small part of a borrower's DTI. He believes a pause in HPA would be healthy, allowing incomes to catch up, and that fundamental housing demand will drive the market through different economic cycles.

Richard Shane from JPMorgan Chase & Co. asked about the infrastructure lending business, questioning the sustainability of its wider spreads, potential for funding efficiencies, and the duration of its assets relative to the core CRE portfolio.

Answer

President Jeffrey DiModica and Sean Murdock, President of Starwood Infrastructure Finance, explained that while market spreads are tightening, they maintain margins by originating more deals directly. DiModica highlighted efficient funding via CLOs at tight spreads, noting the infrastructure business's funding costs did not widen as dramatically as CRE's. They confirmed the asset duration is longer, typically five to seven years, compared to three to five years for CRE loans.

Richard Shane asked if the current market cross-currents put Starwood on the 'front foot' to deploy capital aggressively and whether new types of competitors are emerging.

Answer

Chairman & CEO Barry Sternlicht and President Jeff DiModica addressed the question. Sternlicht affirmed that the current environment is advantageous for Starwood, allowing them to be aggressive due to their scale, experience, and data capabilities, especially in capital-intensive areas like data centers. He also highlighted a 'flight to quality' where borrowers increasingly value Starwood's reliability as a lender. DiModica added that a potential pullback from yield-driven insurance companies in a lower-rate environment could further improve Starwood's competitive position.

Richard Shane from JPMorgan Chase & Co. asked whether Starwood's premium valuation to peers creates an arbitrage opportunity for inorganic growth through acquisitions, questioning if it makes sense to scale the business this way.

Answer

Chairman and CEO Barry Sternlicht responded that the company is agnostic to growth methods but emphasized that Starwood has no true peers due to its diversified business model, multiple revenue streams, and consistent dividend history, arguing it should be valued as a finance company, not just a mortgage REIT. President Jeffrey DiModica added that peers have higher exposure to challenged assets like U.S. office, justifying Starwood's premium.

Richard Shane from JPMorgan asked about the decision-making process for resolving challenged portfolio assets, specifically the criteria used to decide between modifying a loan, selling it, or foreclosing on the property.

Answer

President Jeff DiModica emphasized that Starwood's strong liquidity allows it to be patient and avoid forced decisions based on short-term financial reporting needs. The primary goal is to protect long-term shareholder value by optimizing the asset and timing the exit, rather than being compelled to sell or modify prematurely. They weigh all options to maximize capital recovery.

Richard Shane of JPMorgan Chase & Co. asked for clarification on the current REO balance after recent foreclosures and requested a detailed timeline and strategy for the resolution of each of the six major REO assets.

Answer

Priyanka Garg, EVP of Portfolio & Asset Management, confirmed the pro forma REO balance and provided a strategic overview. She stated the hotel portfolio is targeted for sale in the next couple of quarters. For the mixed-use property, most office condos are sold or under contract, with the retail/signage components now being marketed. The Arizona and Nevada multifamily assets could see near-term resolution, while the newly acquired Dallas assets require more repositioning work before a sale timeline can be established.

Richard Shane of JPMorgan Chase & Co. posed a strategic question about whether maximizing value from loan resolutions currently favors a longer, managed process versus quicker dispositions, and whether the company's liquidity constrains its strategic options.

Answer

President and CFO Michael McGillis responded that resolution strategies are evaluated on a case-by-case basis, driven by the specific facts of each loan. He expressed confidence that additional realizations expected in the second quarter will further improve the company's liquidity position, allowing it to execute on asset-level strategies that maximize recoveries. CEO Richard Mack concurred with this assessment.

Richard Shane of JPMorgan Chase & Co. asked for clarification on Loan #33, questioning if its 'land loan' designation was accurate following a recent modification of a high-profile New York City mixed-use asset.

Answer

Priyanka Garg, Executive Vice President, clarified that Loan #33 is unrelated to the mixed-use asset modification. She confirmed that CMTG has zero exposure to the Chrysler Building, having modified that separate loan in the prior quarter to receive a 15% paydown and improve the collateral package, which now excludes the building's leasehold interest.

Richard Shane questioned the continued growth in loan loss reserves despite significant charge-offs, asking if the ongoing credit migration was surprising and when the challenges in the portfolio might be fully dimensionalized. He also asked about the strategic motivation behind choosing between an REO resolution, which could drag on short-term earnings but offer long-term value, versus a loan sale, which might enhance immediate distributable earnings.

Answer

President and CFO John McGillis explained that establishing reserves is subjective and depends on the resolution strategy for each asset. Richard Mack, CEO, added that the decision between REO and a loan sale is a dynamic capital allocation choice influenced by the strength of market bids, reinvestment analysis, and risk assessment. He noted that currently, strong bids are making loan sales more attractive. Priyanka Garg, EVP, added that the REO focus is on cash-flowing multifamily assets where they can secure efficient financing.

Richard Shane of JPMorgan Chase & Co. asked about the drivers behind elevated loan repayments, questioning if it signaled adverse selection. He also inquired why adjusted net income guidance was raised while adjusted EBITDA guidance was not, and whether the cost of funds would trend lower after a successful securitization.

Answer

CEO Raul Vazquez clarified that higher repayments are a forecasting nuance from current customers, not adverse selection. He explained that adjusted net income benefited from a favorable discount rate on loans due to strong demand, which is not reflected in adjusted EBITDA. Interim CFO Paul Appleton added that while the new ABS deal helps, the runoff of older, low-cost debt still impacts the overall cost of funds, though this effect should lessen over time.

Richard Shane from JPMorgan Chase & Co. asked for details on how Oportun incorporates inflation risk into its underwriting models and whether the moderated originations guidance was a direct result of adjusting for this factor.

Answer

CEO Raul Vazquez detailed that inflation risk is primarily addressed through the V12 underwriting model, which was trained using recent inflationary period data and is scheduled for a minor update. He also mentioned the model incorporates signals to mitigate loan stacking risk. Vazquez clarified that the lower origination guidance is not a direct function of tweaking the model's inflation factor, but rather a broader, prudent decision to defer some marketing spend to the second half of the year pending greater macroeconomic clarity.

Richard Shane from JPMorgan Chase & Co. asked for clarification on the updated 2025 guidance, questioning the drivers behind the revised share count and the factors contributing to the tightening of the EPS range.

Answer

CFO Jonathan Coblentz explained the share count adjustment is a minor update based on projected share awards and turnover, not a material change. He noted the strong guidance is driven by organic revenue growth, flat operating expenses, and an improved credit outlook. CEO Raul Vazquez added that the conservative tightening of the guidance range reflects the early stage of the year and the need to monitor the uncertain economic environment.

Richard Shane of JPMorgan Chase & Co. asked if Q2 2025 represents the trough for net interest income and inquired about the financial drag from non-accrual loans.

Answer

CFO & Treasurer Jeffrey Gonzales confirmed the expectation that with a stable or growing portfolio and reduced drag from non-accruals, net interest income should rebuild from this point. He quantified the quarterly drag from non-accruals at approximately $8.9 million, or $0.17 per share.

Richard Shane of Raymond James questioned the rationale behind maintaining a risk rating of 5 on a Chicago office loan despite its high occupancy and long lease term. He also asked for the expected cadence of resolving non-accruing loans and REO throughout the remainder of the year.

Answer

CEO Bryan Donohoe explained that the Chicago loan's rating reflects a significant shift in the risk premium for office assets, particularly in Chicago, and the impact of higher interest rates since the loan's origination. Regarding the resolution of problem loans, Donohoe stated that the cadence is difficult to predict due to market volatility but emphasized that the company's strong balance sheet allows it to be patient and accelerate resolutions when opportune.

Richard Shane of Raymond James asked for insight into the expected timing and cadence in 2025 for key transitional factors, including loan repayments, deal activity, and realized losses.

Answer

CEO Bryan Donohoe responded that the market recovery accelerated late in 2024. He anticipates maintaining the pace of reducing risk-rated 4 and 5 loans in the first half of 2025, which, combined with a more neutral rate environment and positive capital flows, should set the stage for more active deployment later in the year.

Richard Shane asked for insight into the timeline for working through the current commercial real estate default cycle, noting the industry is getting better at defining the scope of the problem.

Answer

CEO Bryan Donohoe explained that while the resolution cycle is accelerating for most asset classes, the office market recovery is taking longer and remains uncertain. He stated ACRE's strategy is to isolate these problem assets, work with borrowers for an expeditious resolution, and maintain its senior position in the capital stack.

Richard Shane from JPMorgan Chase & Co. sought to confirm that the quarterly provision expense was driven by portfolio growth and asked about the company's strategic approach to navigating the current cross-currents in the CRE market, balancing defense with new opportunities.

Answer

CFO Anastasia Mironova confirmed the increase in the general CECL allowance was largely driven by loan portfolio growth, with no changes to macro assumptions. Chief Investment Officer Scott Weiner added that ARI remains constructive on all forms of housing, including senior and student housing, and select hotels, but is not currently looking to add office exposure.

Richard Shane from JPMorgan Chase & Co. inquired about the expected timing for realizing losses on non-accruing assets, given the significant specific allowances, and whether recent strong origination volume signals that this capital is beginning to be recycled.

Answer

Executive Stuart Rothstein explained that the majority of the specific CECL allowance is tied to two assets: 111 West 57th Street and the Liberty Center retail asset in Ohio. He anticipates bringing the Liberty Center asset to market in late 2025 and noted strong sales momentum at 111 West 57th. Rothstein confirmed that the company's recent origination activity reflects their confidence that no new surprises are forthcoming and that capital from these resolutions will be available for redeployment in late 2025 and early 2026.

Richard Shane from Raymond James asked for insight into the potential cadence of realizing losses from the specific reserve over the next one to two years to better forecast distributable earnings.

Answer

Stuart Rothstein, an executive at Apollo Commercial Real Estate, outlined a timeline for monetizing key assets. He expects capital from the 111 West 57th Street project to begin returning in 2025 for redeployment. The Liberty Center asset in Cincinnati could be marketed in the latter half of 2025, while the Brooklyn REO asset is projected to be ready for sale or refinancing in early 2026. This schedule suggests a phased recapture of underperforming capital starting in the second half of 2025 and continuing into 2026.

Richard Shane of JPMorgan Chase & Co. asked about the challenges of resolving the Massachusetts hospital properties due to their specific use and ARI's capacity to capitalize on new market opportunities.

Answer

Executive Stuart Rothstein expressed confidence in achieving the carrying value of the hospital assets, noting they are exploring alternative uses. He stated that ARI's ability to pursue new deals is primarily driven by loan repayments and the resolution of focus loans, which would free up capital for more productive investments. CIO Scott Weiner added that deal flow is strong across major property types in both the U.S. and Europe.

Richard Shane of JPMorgan Chase & Co. asked about TRTX's portfolio strategy, specifically where the company plans to be offensive versus defensive across different property types and geographies. He also sought commentary on the multifamily sector's fundamentals, including supply absorption and new development trends.

Answer

Doug Bouquard, CEO & Director, stated that TRTX remains offensively focused on its thematic sectors of multifamily and industrial due to their liquidity and strong fundamentals. He noted the current pipeline is still dominated by refinancings but expects acquisition financing to increase as market conditions improve. Regarding multifamily, Mr. Bouquard described fundamentals as 'very strong,' supported by slowing new construction, high residential borrowing rates, and the absorption of prior supply in Sunbelt markets. He confirmed that TRTX is not seeing a significant wave of new construction starts, which strengthens the outlook for existing assets.

Richard Shane from JPMorgan Chase & Co. asked about the resolution strategy for the two remaining 4-rated loans, sought a comparison of terms between TRTX's bank facilities and the current CRE CLO market, and questioned how CECL models are adapting to the recent increase in commercial real estate defaults.

Answer

Executive Robert Foley reiterated that the goal is to maximize shareholder value, which means being "commercially reasonable" on modifications if borrowers recapitalize, or foreclosing if they don't. He noted one 4-rated loan is likely to be repaid via a property sale, while discussions continue on the other. He compared the capital markets, highlighting strong receptivity in the syndicated bank loan market, attractive terms in the note-on-note market, and improving conditions in the CRE CLO market. Regarding CECL, he explained that models now incorporate recent loss data but are forward-looking, balancing historical data with prospective macroeconomic factors to avoid recency bias.

Richard Shane from JPMorgan Chase & Co. asked about NMIH's tactical response to signs of a shifting housing market, such as rising supply and home price depreciation in certain areas, particularly concerning underwriting and risk transfer strategies.

Answer

President & CEO Adam Pollitzer explained that these market shifts, especially in geographies like the Sunbelt, were anticipated and have been proactively managed through pricing and risk selection for a long time. He stressed that no reactive changes are needed. EVP & CFO Aurora Swithenbank added that the company's risk transfer program is already secured for 2025, 2026, and part of 2027, seeing no pressing need for extra coverage but will continue its normal cadence of placing forward flow deals.

Richard Shane asked for the total share buyback amount for the quarter and questioned whether the significant home price appreciation in seasoned loan vintages could lead to adverse selection as borrowers extinguish their PMI.

Answer

CFO Aurora Swithenbank stated that the company repurchased $25.9 million of its common stock during the quarter. President and CEO Adam Pollitzer addressed the adverse selection concern, explaining that they are not seeing it occur. He noted that the prevailing interest rate environment is the primary driver of refinance and cancellation activity, not borrower strategy related to home equity, and reiterated that underwriting quality is consistent across all vintages.

Richard Shane from JPMorgan Chase & Co. inquired about the competitive environment, asking if National MI is facing pressure from mortgage originators on pricing or to loosen credit standards.

Answer

President and CEO Adam Pollitzer described the pricing environment as 'balanced and constructive.' He explained that the company uses its rate engine to price risk appropriately and has not received significant pushback from lenders or pressure to alter its credit aperture, focusing on providing a valuable solution while protecting returns.

Richard Shane asked about the typical timeline for when cumulative default formation peaks for a loan vintage and followed up with a specific question comparing the performance of the 2022 and 2023 cohorts.

Answer

President and CEO Adam Pollitzer explained that conceptually, peak loss incurrence for a vintage typically occurs between years three and six post-origination. Regarding the 2022 and 2023 books, he stated both are performing exceptionally well and are of high quality, with the primary difference from older vintages being less embedded home equity. He expects these newer vintages will incur higher cumulative claims than the 2021 and prior books, but noted their actual performance is tracking well against original pricing expectations.

Richard Shane of JPMorgan Chase & Co. inquired about the company's expense structure, asking for a sustainable run rate and how AI investments would be treated for accounting purposes (expensed vs. capitalized). He also asked about their strategy for sourcing AI solutions, balancing off-the-shelf products with bespoke internal development.

Answer

William Dellal, VP & CFO, confirmed that most AI investments will be expensed due to strict capitalization rules and that the Q2 expense level of around $45 million is a decent run rate. William Greenberg, President & CEO, added that they will likely access AI resources from third-party companies rather than building in-house, though some simple, bespoke tasks might be handled internally. Mr. Dellal noted that third-party solutions often require some customization.

Richard Shane from JPMorgan Chase & Co. observed that the static return estimate range on Slide 14 had widened and asked about the factors driving this change, specifically how varying leverage impacted the calculation compared to the previous quarter.

Answer

President and CEO Bill Greenberg explained that the company now includes a range of portfolio leverage (e.g., 6x to 7x) in the calculation, in addition to prepayment and funding rate variables. He stated this change provides a more informative, medium-term view of return potential that is less susceptible to fluctuations from short-term, dynamic portfolio management decisions, such as the recent tactical adjustments to leverage.

Richard Shane of JPMorgan Chase & Co. inquired about the characteristics of the MSR being purchased and the broader strategy behind the company's increased focus on MSR and the recapture business.

Answer

Chief Investment Officer Nicholas Letica explained that MSR purchases are opportunistic across the WACC range, including intermediate and high WACC pools, as well as current coupon flow MSR, based on where they find value. President and CEO Bill Greenberg confirmed the strategic shift, stating that the MSR and RMBS portfolios now complement each other. He highlighted that the RoundPoint acquisition and the new DTC channel are designed to create an ecosystem around the MSR asset to enhance returns and hedge against faster-than-expected prepayments.

Richard Shane of JPMorgan Chase & Co. asked for details on the gain on sale margin for the recent $1.8 billion loan sale, whether to expect another sale in Q4, and for a better understanding of the Q2 net charge-off rate increase attributed to California wildfire forbearances.

Answer

CFO Pete Graham stated the loan sale pricing was in line with annual expectations, though modestly adjusted from Q1 due to the rate environment, and that a potential Q4 sale would be evaluated later. CEO Jonathan Witter explained that the large, populated area affected by the wildfires caused a timing shift, moving some Q1 charge-offs into Q2, which accounted for the uptick.

Richard Shane asked about the potential impact of a more challenging job market for graduating seniors on Sallie Mae's credit performance and when such effects might appear in the numbers. He also linked this to the growth in loans on extended grace periods, questioning if it reflects economic factors.

Answer

CEO Jonathan Witter stated that while they monitor the job market, the company is well-equipped to handle this type of cyclical stress through programs like extended grace. He noted that despite reports of a tougher job market, it is not currently flowing through into their net charge-off rates. Witter reiterated that the increased use of extended grace is a positive outcome of educating customers about available tools during their transition to repayment, rather than a signal of underlying credit stress.

Richard Shane of JPMorgan Chase & Co. inquired about the performance of the forbearance program and the reasons for the material increase in program participation, especially the uptick between Q3 and Q4 2024.

Answer

CFO Pete Graham explained the growth in forbearance participation is expected as the programs, rolled out a year ago, have a two-year cycle. He attributed the Q4 uptick to seasonality in repayment waves. CEO Jon Witter added that financial distress is most common in the first 12 months of repayment, aligning with these seasonal waves, and noted that program performance improves the longer a borrower remains enrolled.

Richard Shane delved into the potential Q4 loan sale, asking if its size would correspond to the origination outperformance, and questioned the philosophy of reaffirming guidance when strong growth could optically distort earnings.

Answer

CFO Pete Graham clarified that a loan sale is a possibility to manage capital and meet EPS guidance if growth exceeds the high end of their target, but it is not the first priority. CEO Jon Witter added that while they would consider a growth-over-earnings trade-off, they are currently reaffirming guidance based on expected improvements in the reserve rate, making such a trade-off hypothetical for now.

Richard Shane from JPMorgan Chase & Co. asked about the dynamics of the residential credit portfolio, particularly its insulation from risk, given expectations for lower rates and negative home price appreciation (HPA). He also inquired about the availability of vintage-level data for the portfolio.

Answer

CEO & Co-CIO David Finkelstein and Co-CIO & Head of Residential Credit Mike Fania addressed the question. Fania detailed proactive credit tightening since 2022, resulting in a high-quality portfolio with a 764 weighted average FICO in the current pipeline and a 62% mark-to-market LTV. He noted that prepayment speeds on non-QM loans are less sensitive to rate rallies than agency loans. Regarding vintage data, Fania stated it is not currently disclosed but offered to follow up offline.

Richard Shane of JPMorgan Chase & Co. questioned the dynamics of the residential credit portfolio, particularly its insulation from risk amid expectations for lower rates and negative home price appreciation (HPA).

Answer

CEO David Finkelstein and Co-CIO Mike Fania highlighted the portfolio's high credit quality, resulting from proactively tightened standards, high FICO scores, and low LTVs. Fania noted that prepayment speeds in the non-QM market are flatter than in the agency market, providing insulation against a rate rally, and that the portfolio is resilient to significant HPA shocks.

Richard Shane of JPMorgan Chase & Co. asked about the portfolio's incremental shift toward discount bonds and whether prepayment speeds might be structurally higher in the future due to technology and borrower behavior.

Answer

V.S. Srinivasan, Head of Agency, confirmed the shift to intermediate coupons was driven by attractive roll characteristics and relative value. He also affirmed that prepayment speeds are expected to be higher than historically, citing faster refinancing on certain coupons in late 2024. He attributed this to larger loan sizes and the shift from bank to nonbank originators, which creates more negative convexity.

Richard Shane of JPMorgan Chase & Co. asked about the strategic shift towards discount mortgage bonds and whether prepayment speeds might be structurally higher in the future due to technology and borrower expectations.

Answer

V.S. Srinivasan, Head of Agency, confirmed the shift to intermediate coupons was driven by attractive relative value and a bias for lower rates. He also affirmed that prepayment speeds are expected to be faster than historically, citing recent data from late 2024, the proliferation of nonbank originators, and higher loan sizes as key drivers. CEO David Finkelstein added that these discount bonds offer a favorable convexity profile.

Richard Shane of JPMorgan Chase & Co. asked about the competitive dynamics in the Mortgage Servicing Rights (MSR) market, particularly how lower origination volumes and originator focus on recapture are impacting the investment opportunity.

Answer

Head of MSR Ken Adler explained that lower originator profitability actually increases the supply of MSR for sale, as lenders need to monetize assets. CEO David Finkelstein added that Annaly is positioned as a strategic capital partner for these originators. Ken Adler also noted that Annaly's reliability and scale make it a preferred partner, helping to offset increased demand from other capital sources.

Richard Shane of JPMorgan Chase & Co. asked about the competitive landscape for Mortgage Servicing Rights (MSR), considering the shift to higher coupon MSR, originator focus on recapture, and the potential for lower origination volumes.

Answer

Ken Adler, Head of Mortgage Servicing Rights, explained that lower originator profitability actually increases the supply of MSR for sale, as lenders need to monetize assets. He highlighted Annaly's advantage as a reliable, strategic capital partner. CEO David Finkelstein added that this dynamic aligns with their business model to provide liquidity to the origination community.

Richard Shane from JPMorgan Chase & Co. raised concerns about the existential risk of rapid prepayments in a sharply lower rate environment, questioning if modern mortgage technology could undermine prepayment protections.

Answer

Peter Federico, President, CEO & CIO, acknowledged the risk and increased market efficiency. However, he contextualized it by explaining that a market-wide refinancing event would require a dramatic drop in mortgage rates (e.g., to 5%), which is unlikely given current macroeconomic pressures. He noted only 5% of the mortgage universe currently has a refinance incentive, and factors like GSE reform and regional home price trends could further limit future prepayment speeds.

Richard Shane of JPMorgan Chase & Co. highlighted the significant market volatility in the first few weeks of the quarter, including rising Treasury yields and widening spreads, and asked about the updated impact on book value and the associated near-term risks and opportunities.

Answer

Peter Federico, President and CEO, acknowledged the volatility, attributing it to pre-election uncertainty and confirmed that tangible net book value was down approximately 3.5% month-to-date. He emphasized that AGNC was positioned defensively with low leverage (7.2x) and a high unencumbered cash position ($6.2 billion), providing capacity to navigate the short-term turbulence and capitalize on opportunities once market fundamentals reassert themselves.

Richard Shane asked if recent pricing changes (PPPCs) structurally enhance the return on assets for prime borrowers and how the company balances loosening credit with observing more disciplined consumer behavior.

Answer

EVP and CFO Brian Wenzel confirmed that PPPCs have the potential to improve the ROA on prime segment borrowers, making them more capital efficient. President and CEO Brian Doubles described the process of loosening credit as a balance of 'art and science,' managed within their long-term 5.5%-6% net charge-off target. He noted they are prudently expanding in areas with strong risk-adjusted returns, like Health & Wellness, while monitoring the economic environment.

Richard Shane from JPMorgan Chase & Co. delved into the Dual Card product, asking about its credit profile compared to private label cards and whether its performance would differ in an economic slowdown. He also inquired about how the utility of a card—being usable in one place versus many—impacts consumer payment behaviors.

Answer

CFO Brian Wenzel explained that Dual Card holders generally have a higher credit quality, though proprietary scores also play a role. In a downturn, Dual Cards would likely have a lower incidence of charge-offs but higher severity due to larger balances, contrasting with private label's higher incidence but lower severity. He noted that broad utility, as seen in PayPal, Amazon, and CareCredit cards, is important, but the consumer's connection to the partner brand is also a primary driver of usage and payment.

Richard Shane questioned the rationale for guiding the Q4 reserve rate down from a Q3 cyclical high, asking what changed in the company's outlook in such a short period.

Answer

EVP and CFO Brian Wenzel explained that the change is not due to a fundamental shift in credit trajectory but is primarily a mechanical function of the calculation. The reserve rate is the reserve dollars divided by the end-of-period loan number. The denominator (loan balance) is expected to change seasonally in Q4, which mechanically affects the resulting rate, rather than a change in the dollar amount of expected losses.

Richard Shane of JPMorgan followed up on the timing of expenses related to the card refresh, asking if costs have been pulled forward or if a step-function increase should be expected.

Answer

CFO Christophe Le Caillec clarified that no expenses were pulled forward and that the timing was part of the original plan. He expects an increase in the cost of card member services in Q4, post-launch. Chairman and CEO Stephen Squeri added succinctly that for product refreshes, 'the expenses come before the revenues.'

Richard Shane asked about tactical investment opportunities in the current cycle and the company's approach to capital allocation, noting a high level of retained profits in the quarter.

Answer

CEO Stephen Squeri emphasized that strategic, long-term investments in technology and product refreshes will continue, as stopping and starting them is detrimental. CFO Christophe Le Caillec added that capital allocation is governed by their CET1 ratio target of 10-11%, and the Q1 capital return was in line with their plans, also noting the recent 17% dividend increase.

Richard Shane asked if AXP's increased focus on experiences and incentives, such as lounges, provides higher operating leverage due to their fixed-cost nature compared to variable rewards.

Answer

CEO Stephen Squeri agreed with the premise, confirming that experiential investments have more fixed costs, which can be leveraged across a growing customer base. He compared it to technology infrastructure, where you invest in capacity and then grow into that scale. He affirmed that balancing these fixed-cost experiences with variable rewards is a key part of their strategy to deliver value and drive leverage.

Richard Shane from JPMorgan Chase & Co. asked why, with earnings tracking well above guidance, the company was allowing profits to fall to the bottom line rather than pulling forward more investments, and if this implied diminishing marginal returns on spend.

Answer

CEO Stephen Squeri clarified that marginal returns are not diminishing. He explained that the company is already executing a significant investment ramp-up in marketing, technology, and controls. At the current scale, it is more effective to layer in investments on a continuum rather than 'jamming' them into a single quarter. He expects investment levels to continue growing into 2025.

Richard Shane from JPMorgan Chase & Co. inquired about the significant decrease in MSR amortization expense and sought guidance on modeling this metric, also asking for an outlook on gain-on-sale margins for the second quarter.

Answer

Executive Desiree Elwell explained that the lower MSR amortization was due to a quarter-over-quarter decrease in prepayments, influenced by rate movements at the end of Q4 2024. Regarding margins, Elwell stated that the company is still operating within its historical range of 330 to 340 basis points and does not foresee any changes that would affect that number, noting the Q1 uptick was consistent with typical seasonality.

Richard Shane asked about the gradual decline in the unpaid principal balance (UPB) of retained MSR, its potential stabilization point, and whether higher purchase-related employee expenses were a factor. He also asked for a technical clarification on the timing of MSR valuation for originated loans.

Answer

Desiree Elwell, an executive, explained that the MSR retention rate is a function of execution and profitability, balancing portfolio growth with cash generation from service-released sales. Terry Schmidt, an executive, added that aggressive correspondent pricing in a heavy purchase market influences this decision. David Neylan, President and COO, affirmed a long-term goal of retaining 80-85% of originations. Both Terry Schmidt and Desiree Elwell clarified there is no direct link between MSR strategy and employee expenses. On the technical question, Desiree Elwell detailed that MSR value is included in the gain on sale at lock, with the final valuation occurring at the end of the month of the loan sale.

Richard Shane asked for details on the MSR retained during the quarter, the drivers for a perceived increase in the MSR capitalization rate, and the unit economics of a recapture refinance versus a newly sourced loan, considering MSR amortization and loan officer compensation.

Answer

Desiree Elwell, Executive, confirmed that about $4 billion in MSRs were retained (68%) and stated there were no significant changes in underlying cap rate assumptions. Terry Schmidt, Executive, explained that loan officer compensation is lower for portfolio recaptures. While the per-loan net profit might be less after accounting for MSR amortization, the overall dollar profit is expected to be higher due to increased volume from both recapture and new business.

Richard Shane requested a breakdown of Q1 originations to distinguish between new projects and reinvestments, and also asked for the amount of non-cash interest income included in distributable earnings.

Answer

Executive Paul Elenio confirmed that the Q1 originations were almost entirely new products, including $367M in new bridge loans and $131M in SFR bridge loans. He stated that $15.3 million of non-cash PIK interest was booked in the quarter and noted that this level is a 'pretty good run rate' for now, though the figure is dynamic and subject to change.

Richard Shane requested a breakdown of the new earnings guidance, asking about the drag from non-accruals, the contribution from PIK interest, and the nature of the cited legal costs. He also asked if the quarter's preferred and mezzanine investments were related to loan modifications.

Answer

Executive Paul Elenio clarified the $0.03 to $0.05 in legal/consulting fees is an annual estimate related to short-seller reports. He detailed that the earnings drag comes from reduced agency volume, the full impact of lower SOFR, and non-earning REO assets. He estimated PIK interest would be similar to past quarters, around $10-$15 million. He also explained that the pref/mezz investments are typically made behind new agency loans to help borrowers recapitalize deals, not as new opportunistic investments.

Richard Shane of JPMorgan Chase & Co. questioned the agency business backlog, asking if it represented a deferral or a lost opportunity. He also requested the specific amount of non-cash Payment-In-Kind (PIK) income in Q3 and clarification on the accounting policy for REO assets.

Answer

President and CEO Ivan Kaufman explained that agency processing delays caused a $200-$300 million portion of the pipeline to miss the low-rate window, making those deals now highly rate-sensitive. Executive Paul Elenio detailed that there was $15 million of PIK interest in Q3, up from about $10 million in Q2. He also clarified that for REO assets, a potential gain or loss is determined by appraisal upon takeover but is not realized until the property is sold.

Richard Shane of JPMorgan Chase & Co. inquired about the risk-rated '4' loan book, its size, and the historical transition of these loans to either '3' or '5'. He also asked about the impact of the new CLO's 30-month reinvestment period on future originations and whether such a deal could be replicated in the current volatile market.

Answer

CEO Katharine Keenan explained that the focus is on the ~$500 million non-modified 4-rated office loan book, which has been significantly reduced. She noted that the new CLO provides valuable optionality for financing new originations, complementing strong bank relationships. Keenan also expressed satisfaction with the timing of the CLO execution, acknowledging the difficulty of replicating it in the current market but noting signs of stabilization.

Richard Shane sought to confirm the $1.6 billion in quarter-to-date repayments, asked about the funding timeline for the new $2 billion pipeline, and questioned if the recent increase in PIK income represented a new run rate.

Answer

CEO Katharine Keenan confirmed the $1.6 billion in quarter-to-date repayments were all at par and noted the new pipeline is largely funded at closing due to lower construction activity. CFO Tony Marone clarified that PIK income is idiosyncratic and should not be modeled on a straight-line basis, as it is not a material component of earnings.

Richard Shane of JPMorgan Chase & Co. asked if the company's historical ROE target of 7-8% above the benchmark rate is a realistic goal as it emerges from this period of resolutions. He also inquired about the timeline for achieving this potential, asking if exiting 2025 was a reasonable expectation.

Answer

CEO Katie Keenan agreed that the company is not a "burn-down" story and is focused on creating the next-generation portfolio. While not committing to a specific timeline, she stated that the path to realizing the company's earnings potential has "gotten shorter" and will happen "more quickly" due to the acceleration in the capital markets. She emphasized the attractive current dividend yield and the unpriced potential for future growth.

Richard Shane asked about the new $150 million share repurchase authorization, questioning how aggressively it would be used and what loan hurdle rates would be compelling relative to buying back stock at a discount to book value.

Answer

CEO Katie Keenan explained the buyback is one of several capital allocation tools, not a direct reallocation from the dividend, and will be used dynamically based on relative value. She noted that new loans target mid-teens levered returns, which serves as a benchmark to weigh against the value of repurchasing shares or debt.

Richard Shane questioned Navient's strategy for its in-school lending business, noting its low market share after five years and asking why the company isn't pursuing more aggressive growth in that area.

Answer

CEO David L. Yowan responded that Navient's strategy is not passive but is purposefully focused on a specific customer segment that fits the Earnest business model: high-balance, high-credit-quality students acquired through low-cost digital channels. He emphasized this is a customer-focused strategy rather than a market-share-focused one.

Richard Shane sought clarification on the share repurchase strategy, asking if it will be opportunistic or curtailed, and questioned the path to a higher Return on Tangible Common Equity (ROTCE) given that the current guidance implies a mid-single-digit return.

Answer

CFO Joe Fisher confirmed that share repurchases will be opportunistic, viewing the stock's discount to tangible book value as attractive. CEO David Yowan and Vice Chair Edward Bramson explained that valuation is not just about static ROE but also about demonstrating growth potential. They are currently evaluating the optimal mix of growth and returns to enhance shareholder value.

Richard Shane questioned whether the increased Q4 share repurchase cadence would be a new run rate for 2025 and asked for an update on the progress of the previously announced reduction in force.

Answer

CEO David L. Yowan stated that the 2025 capital allocation plan will remain flexible, balancing loan growth, debt reduction, and share repurchases based on market conditions, highlighting the attractiveness of buybacks at the current discount to tangible book value. He also confirmed that the company is about halfway through its workforce reduction plan, with major progress from the MOHELA transfer and healthcare business sale, and has clear visibility on the remaining steps.

Richard Shane inquired about Navient's long-term growth strategy following the significant strategic actions to reduce expenses and divest the Business Processing Solutions (BPS) division.

Answer

CEO David L. Yowan stated that the immediate priority is completing the expense reduction initiatives. He outlined three primary uses for the substantial cash flow expected from loan portfolios and the BPS divestment: investing in the Earnest business, reducing unsecured debt, or distributing capital to shareholders. Yowan emphasized that future growth would be centered on Earnest's high-quality loan originations and that a clearer capital allocation plan would be provided once the BPS sale proceeds are determined.

Richard Shane asked about Navient's long-term growth strategy beyond the current expense reduction initiatives, questioning where future growth will originate.

Answer

CEO David L. Yowan responded that the immediate priority is completing the complex expense reductions. He outlined that future cash flow from loans and the BPS divestment will be used for investment in the Earnest business, reducing unsecured debt, or shareholder distributions. Growth will be focused on Earnest, contingent on generating returns above the cost of capital.